Where Are We Now?

When an employee takes annual leave, how do you calculate their holiday pay?  The answer to this question is far from straightforward and is still proving to be a headache for many care providers.

The starting point is that all workers - including casual and zero hours staff - are entitled to at least 5.6 weeks paid holiday each year. However, how that holiday is paid depends on the type of contract the worker holds.

Casual staff

Staff without fixed hours of work who work as and when required, must have their holiday pay calculated on the basis of their previous 12 weeks’ pay (by effectively taking an average of their week’s pay). This should include payments for sleep in allowances, unsocial hours or weekend allowances etc. The only payments excluded from this calculation are reimbursement for expenses/travel costs etc. 

This applies to all 5.6 weeks paid holiday. 

Normal hours workers

Calculating the pay of workers contracted to work a certain number of hours/days per week or month is more complex and has been subject to litigation both in the UK and at EU level. After a period of uncertainty, the position is now clear. All overtime payments - whether compulsory or voluntary - must be included in the calculation if they have been worked on a regular or recurring basis. This means that anything other than ad hoc arrangements should be included. Plus, any allowances that form part of the worker’s normal pay such as unsocial hours payments, sleep in shift enhancements etc must also be included. A weeks’ holiday pay is then worked out by averaging pay over the previous 12 weeks.

However, these additional payments only have to be included in the first four weeks leave taken and not to the additional 1.6 weeks which can be paid at basic pay. Care companies that adopt this approach must make sure they have payroll systems that are sophisticated enough to distinguish between the two different rules to ensure that staff are not underpaid.

Term time only arrangements

Many carers only work part of the way through a year because of other commitments either on term time only contracts or zero hours contracts. A recent case – Brazel v The Harpur Trust decided that workers employed on permanent contracts for part of the year must receive at least 5.6 weeks paid leave even though they don’t work for the whole year. Employers can’t pro-rate their holiday entitlement to reflect the number of weeks they are contracted to work part year. This decision means many workers will have been underpaid.

The court also examined the common practice of working out holiday by applying 12.07 % to the number of hours worked. The Court of Appeal said this was incorrect as a matter of principle when applied to pay, but also to accrual where individuals work for part of the year. Care providers may therefore need to review contracts that include this method of calculation and take advice if they are concerned.

The pay reference period is changing

As we have outlined, to correctly calculate each worker’s holiday pay, care providers have to go back 12 weeks to work out their weekly average pay - ignoring any weeks where the worker hasn’t worked. This is to ensure their holiday pay represents their normal pay. From April next year, the pay reference period is changing to 52 weeks and care providers need to make sure that their payroll systems are adapted.

Liability for claims

When the holiday pay litigation first hit the headlines, many care providers worried that they would be liable for underpayment of holiday pay going back many years. Those concerns were reduced following the controversial judgment in the case Wood and others v Hertel and Fulton and Bear Scotland Limited which imposed restrictions which made it virtually impossible for workers to include underpayments that occurred in previous leave years as part of their unlawful deductions claims. Then, in England, Wales and Scotland, the government introduced legislation, which meant workers could only recover underpaid holiday for a maximum of two years. 

That judgment is now in doubt. Recently, the Court of Appeal in Northern Ireland in Chief Constable of the Police Service of NI and others v Agnew decided that the technical arguments employers have been able to use to limit their historic liability for holiday pay claims are incorrect and has led to ‘arbitrary and unfair’ results. This means that workers could recover underpayments going back up to twenty years. In this case, the stakes were high. The claim involved 3,380 police officers and 264 civilian employees who collectively had been underpaid around £30 million. 

Decisions in Northern Ireland are not binding in England & Wales, but we expect this decision to be persuasive and may affect the outcome of future cases in England, Wales and Scotland. 

The holiday pay issue is therefore a minefield, particularly for those working in the care sector, where there is no one standard form of employment. Care providers that aren’t correctly calculating the holiday pay should therefore take urgent advice to reduce their potential liabilities. 

This article first appeared in the October edition of Care Markets